Investor Perspectives: Stocks vs. Bonds in the Airline Industry
Understanding the cautious approach of investors towards airline stocks, owing to historical disappointments, is crucial. The struggle of airlines to generate returns surpassing their capital costs has deterred many, even leading to Warren Buffett’s loss on such investments. Debt providers, however, have found solace in consistent returns, backed by the sector’s tangible assets like airplanes, unlike equity investors bearing the brunt of losses.
In this scenario, Delta Air Lines shines as an exception. Dissecting revelations from the recent J.P. Morgan Industrials Conference, Delta’s management revealed profitable strides in covering its cost of capital, hinting at a promising future.
The Delta Difference
While the airline sector may seem like a risky territory, Delta’s trajectory points to a different narrative. The airline’s commitment to restoring value for shareholders is evident through substantial earnings growth as the aerospace industry rebounds post-COVID restrictions.
|
Delta Air Lines |
2022 |
2023 |
Long-Term Target |
|---|---|---|---|
|
Return on invested capital |
8.40% |
13.40% |
Mid-teens |
|
Weighted average cost of capital |
8% |
8% |
8% |
Data source: Delta Air Lines.
Delta’s robust financial performance is evident in the reported earnings, free cash flow, and improved credit metrics, marking a positive shift in its balance sheet health.
|
Delta Air Lines |
2022 |
2023 |
2024 Estimate |
|---|---|---|---|
|
Earnings per share |
$3 |
$6.25 |
$6 to $7 |
|
Free cash flow |
$200 million |
$2 billion |
$3 billion to $4 billion |
|
Adjusted debt to EBITDAR |
5X |
3X |
2X to 3X |
Data source: Delta Air Lines.
Delta’s strategic debt repayment approach reflects a positive outlook, enhancing both shareholder and creditor confidence in the company’s financial outlook.
Delta’s Compelling Valuation
Trading at highly discounted forward price-to-earnings and free-cash-flow ratios, Delta presents an attractive investment opportunity despite recent market skepticism due to cost pressures and revenue growth concerns.
Image source: Getty Images.
Delta’s focus on premium markets, prudent capacity management, and revenue streams like loyalty-program revenue through partnerships, particularly with American Express, fortify its position as a top contender in the airline industry.
Embrace this chance to soar with Delta Air Lines, a standout choice in a sector laden with uncertainty and volatility.
Before taking the plunge, explore all options:
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Disclosure: American Express advertises with The Ascent, a Motley Fool company. JPMorgan Chase is also an advertising partner of The Ascent. None of the mentioned stocks are held by Lee Samaha. The Motley Fool has positions in and endorses JPMorgan Chase. The Motley Fool advocates for Delta Air Lines and operates with full disclosure guidelines.
The viewpoints and interpretations expressed herein are solely those of the author and do not necessarily align with the perspectives of Nasdaq, Inc.
